Comments on Does More "Skin in the Game" Mitigate Bank Risk-Taking?It is widely said that a lack of “skin in the game” would distort lenders’ incentives and cause a moral hazard problem, that is, excessive risk-taking. If so, does more skin in the game—in the form of extended liability—reduce bankers’ risk-taking? In order to examine this question, we investigate historical data prior to the Great Depression, when bank owners’ liability for losses in the event of bank failure differed by state and primary regulator. This post describes our preliminary findings. TypePad2018-01-25T15:15:48ZNew York Fedhttps://libertystreeteconomics.newyorkfed.org/tag:typepad.com,2003:https://libertystreeteconomics.newyorkfed.org/2018/02/does-more-skin-in-the-game-mitigate-bank-risk-taking/comments/atom.xml/Wilson Ervin commented on 'Does More "Skin in the Game" Mitigate Bank Risk-Taking?'tag:typepad.com,2003:6a01348793456c970c01bb09f3a38e970d2018-02-15T20:58:46Z2018-02-16T13:24:02ZWilson ErvinInteresting analysis, but I thought that BOTH the higher cash ratio and lower capital for double indemnity banks was a...<p>Interesting analysis, but I thought that BOTH the higher cash ratio and lower capital for double indemnity banks was a logical outcome. The lower capital ratio - if I understand the graphic properly - reflects only the cash portion of equity, not the backup &#39;unfunded commitment&#39; portion. A double indemnity bank should be able to compete successfully for depositors by advertising its hard &#39;total ownership support ratio&#39;, including both the funded and the unfunded portions of capital. Creditors might haircut the value of the unfunded portion - perhaps by 50% or so. but the net solvency support would still be stronger in this case from the double indemnity group. </p>Doug Chorna commented on 'Does More "Skin in the Game" Mitigate Bank Risk-Taking?'tag:typepad.com,2003:6a01348793456c970c01b7c94f2a66970b2018-02-12T17:05:18Z2018-02-12T20:36:55ZDoug ChornaWell done. To me the bigger issue is that banks are, to a large extent, financing a major worldwide bubble....<p>Well done.</p>
<p>To me the bigger issue is that banks are, to a large extent, financing a major worldwide bubble.</p>
<p>If/when the bubble bursts, many banks will not have the capital to withstand the downturn, skin in, or not.</p>
<p>The FED/Treasury need to prepare for this.</p>Phil Prince commented on 'Does More "Skin in the Game" Mitigate Bank Risk-Taking?'tag:typepad.com,2003:6a01348793456c970c01b8d2d9858a970c2018-02-12T14:08:29Z2018-02-12T20:36:55ZPhil PrinceWhen the owner/manager is on the hook, what you discover is that it's liquidity, and certainty of liquidity, that really...<p>When the owner/manager is on the hook, what you discover is that it&#39;s liquidity, and certainty of liquidity, that really matters. Absent total economic meltdown (which usually follows, not precedes, a banking crisis), it&#39;s not that easy for a bank to lose all its capital unless it has to fire sale assets. Owner/managers will tend to overshoot the LCR and undershoot the leverage ratio.</p>